Most businesses have a variety of assets, including real estate, equipment and supplies. Individual asset disposal or sale may take place as part of normal business, or all assets may be sold at once when the business is sold or closes. For tax purposes, loss or gain on the sale of assets is calculated individually for each asset.
Definition of an Asset
An item is an asset if it retains some value at the end of the tax year. It may be a tangible possession owned by an individual or business. Buildings, furniture, vehicles and equipment are all tangible assets. The value of an asset may increase over time, as real estate often does, or it may lose value or depreciate, which is what happens with most motor vehicles.
Intangible items that can't be touched, such as patents, trademarks and copyrights, can also be assets. Investment securities like stocks and bonds are also viewed as assets for tax purposes. When two businesses decided to trade assets with the same value, the transaction is referred to as a like-kind exchange and is nontaxable.
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Sale of Assets
The term sale of assets refers to a business selling some or all of its property. This is frequently done as part of the sale or closing of a business or a merger between two businesses. The sale of assets for a business is more complex than for an individual. Prior to the sale, the businesses involved must draw up and agree to a business contract that describes how asset ownership will be transferred, how the sale will be funded and other details related to the sale.
Even when a business is sold all in one piece, the Internal Revenue Service requires that the sale of each asset be treated separately for tax purposes. Some assets are categorized as capital assets that may incur capital gains and losses, while other assets are categorized as depreciable property. Real property is categorized separately, such as land and buildings.
Asset Cost Basis
The cost basis of an asset is used to determine whether its sale will result in a gain or loss. The cost basis is derived from the original purchase price of the asset, plus improvements to the asset and minus related expenses. Then depreciation based on the age of the asset is factored in. The final result is the cost basis. If the sale price of the asset is higher than the cost basis, there is a capital gain on the sale. If it's less, there is a loss.
Depreciation and Amortization of Assets
The value of business assets and the amount they will earn in a sale varies over time. Tangible assets lose value as time passes due to wear and tear or obsolescence, a process referred to as depreciation. The amount of gain or loss resulting from the sale of a tangible asset is influenced by the asset's depreciation. The term amortization refers to spreading the cost of an intangible asset over its useful lifetime. Assets that have been amortized may not have resale value.
Asset Sales and Business Taxes
IRS Form 4797, Sales of Business Property, is used to report gains and losses for the sale of many types of business assets. Many business asset sales fall under section 1231 on Form 4797 as gains or losses from the sale of depreciable property that has been held by a business for more than a year. This form is used for a wide range of situations involving the transfer of different types of assets, which makes it particularly challenging to complete. Many businesses consult a tax professional about completing Form 4797 for the sale of business assets.